Euro Area Policies: 2023 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Euro Area; IMF Country Report No. 23/264

The 2023 Article IV Consultation discusses that the euro area economy has shown remarkable resilience in the aftermath of Russia’s invasion of Ukraine and the largest terms of trade shock in several decades, thanks to a swift policy response and a strong rebound in contact-intensive services. Looking ahead, growth is expected to pick up gradually throughout 2023 and 2024, supported by a recovery in real incomes in the context of continued tight labor market conditions, a further easing of supply constraints, and firmer external demand, even as financial conditions continue to tighten. While headline inflation has fallen sharply recently after reaching record high levels, core inflation is proving more persistent. As tight financial conditions restrain demand and supply shocks dissipate further, inflation is set to decline further but is expected to remain elevated for an extended period. Renewed supply shocks, which could result from an escalation of the war in Ukraine and a related increase of commodity prices, or a further intensification of geoeconomic fragmentation, would also push up inflation and hurt growth. On the upside, the economy could again prove more resilient than expected, especially amid a still large stock of excess savings.